Concept of Market
For an individual it would mean a shopping complex or a place where he/she can buy things. But, in economics, the concept of market is very different from this. It doesn’t refers to any geographical area where goods are sold and purchased. Instead, it refers to all such systems that bring the buyers and sellers in contact with each other to settle the sale and purchase of goods. The system could be an electronic mail or an online order for a product.
Types of Markets
Mainly there are four types of market
1. Monopoly
2. Oligopoly
3. Monopolistic Competition
4. Perfect Competition
Explanation
1. Monopoly – It is a form of market in which there is a single seller of a product with no close substitutes. For example Railways in India are a monopoly industry of the government of India.
An Industry is a Group of Firms producing a particular product.
Features of Monopoly
1. One seller and large number of buyers
2. Sells Homogeneous or Differentiated product
3. Price is not uniform because of Price Discrimination
4. Restrictions on the entry of the new firms
5. Imperfect Knowledge
6. Imperfect Mobility
7. Slopes Downward with Low Elasticity (AR>MR)
8. No Advertising Costs
9. Full control over price
10. Earns Extra-Normal Profits or Abnormal Profits in the Long Run. (AR>AC)
11. No close Substitutes
Price Discrimination – Price Discrimination refers to the practice of charging different prices for different buyers for the same good or product.
Conclusions
1. A Firm under Monopoly is a Price Maker.
2. Demand Curve in case of a Monopoly Firm Slopes Downward.
3. A Monopoly Firm earns Abnormal Profits or Extra Normal Profits, both in the short run and the long run.
2. Oligopoly – Oligopoly is a form of market in which there are a few big firms and a large number of buyers of a commodity (product). Each firm has a significant share of the market. Price and output decision of one firm significantly impacts the price and output of decisions of the rival firms in the market. There is a high degree of interdependence among the competing firms, Price and output policy of one firm depends on the price and output policy of the other’s.
Features of Oligopoly
1. Small Number of Big Firms or Sellers and a large number of Buyers
2. Sells Homogeneous or Differentiated Products
3. Price is Not Uniform because of product differentiation
4. Entry Barriers
5. Imperfect Knowledge
6. Imperfect Mobility
7. Firms Demand Curve can’t be Specified , because there is no specific relationship b/w price and quantity demanded
8. Advertising Costs
9. Partial control over Price
10. High Degree of Interdependency in Decision Making
11. Non-Price Competition
12. Earns Extra-Normal Profits or Abnormal Profits in the Long Run. (AR>AC)
3. Monopolistic Competition – It is a form of market in which there are many buyers and sellers of the product, but the product of each seller is different from that of the other. So there are many sellers, selling a differentiated product. Product differentiation is generally promoted through trademark or brand name. For example firms producing different brands of toothpastes, like Colgate, Close-up, Pepsodend etc.
Monopolistic Competition includes the features of monopoly and perfect competition. Trademark or Brand Name gives some monopoly power to the firms.
Features of Monopolistic Competition
1. Large number of buyers and sellers
2. Product Differentiation
3. Price is Not Uniform, because of product differentiation
4. Freedom of entry and exit
5. Lack of perfect knowledge
6. Lack of perfect mobility
7. Downward Sloping Demand Curve, high elasticity of demand, (AR>MR)
8. Advertisement Cost
9. Partial control over price
10. Non-Price Competition
11. Normal Profits in long run (AR = AC)
4. Perfect Competition – Perfect Competition is said to be exist when there is a large number of sellers and buyers of a commodity (product), and no individual buyer or seller has any control over its price. Product is homogeneous and its price is determined by the forces of market supply and market demand.
Feature of Perfect Competition
1. Large number of small Buyers and Sellers of a Commodity (Product)
2. Sells Homogeneous Product
3. Uniform Price of Product
4. Freedom of Entry and Exit
5. Perfect Knowledge
6. Perfect Mobility
7. Perfectly Elastic Demand
8. Slope of the Demand Curve is Horizontal Straight Line (AR = MR)
9. No Advertising Costs
10. No Control over Price
11. Normal Profits in long run (AR = AC)
12. No Extra Transport Cost
13. Independent Decision Making (related to price and output)
Conclusions
1. A Firm under perfect competition is a Price Taker, not a Price Maker
2. Demand Curve of the form under perfect competition is Perfectly Elastic
3. A Firm under perfect competition earns only Normal Profits in the long run.
Aim Institute of Economics 